In 2020, a substantial number of banks withdrew from trade and receivables finance as they acclimatised to economic difficulties across the world.  The space they left behind has been assessed by asset managers, alternative investors and funders who see the potential to generate returns in a low-interest-rate environment.

At first glance the opportunity seems promising and deeper analysis reveals even more potential. Advanced analytics and technology platforms are making receivables finance more efficient and secure. The increased sophistication is also opening new opportunities for assisting those looking to gain greater exposure to ESG investing.

ESG shows resilience in 2020

Blackrock defines ESG investing as combining traditional investing with environmental, social, and governance-related (ESG) insights to improve long-term outcomes for investors. Their view is that companies with strong material sustainability profiles have the potential to outperform those with poor profiles. Their research has shown that this has been evident during the pandemic.

In the first quarter of 2020, Morningstar reported that 51 of their 57 sustainable indices outperformed their broad market counterparts, together with 15 of MSCI’s 17.  While this demonstrates resilience during the pandemic, the most important question is for investors is “why?” What explains this performance?

Research by BlackRock has established correlations between sustainability and traditional factors such as quality and low volatility, which themselves indicate resilience. As a result, they expect sustainable companies to be more resilient during downturns. They also believe that their outperformance has been caused by a range of sustainability characteristics, including job satisfaction of employees, the strength of customer relations and the effectiveness of the company’s board.

Overall, this period of market turbulence and economic uncertainty has further reinforced their conviction that ESG characteristics ensure resilience during market downturns. As we enter a period of immense volatility, if the research is to be believed, then ESG investing will not only support positive environmental change but also provide an enhanced return for investors.

The attraction of receivables finance

It is easy to understand the attraction of receivables finance. Increasingly, it is recognised as a low-risk, expandable and relatively recession-proof form of lending. Receivables finance is characterised by consistent cash flows, minimal correlation to other asset classes, a low default rate, self-liquidating and better risk-adjusted total returns than, for example, Treasuries.

According to the most recent annual Trade Register report from International Chamber of Commerce, published in May 2020, default risk for trade finance overall is low and stable. Payables finance is structured differently from receivables-backed working capital finance but shares a comparable risk profile, with a default risk similar to, and by some measures actually lower than other trade finance products.

Although market-wide data is not yet available for 2020, short-dated trade finance appears to have remained resilient. HSBC for example recently reported that adjusted revenues for its Global Trade and Receivables Finance unit held steady in the first half of 2020 alongside previous years.

How technology supports receivables finance and ESG investing

Advanced technology is improving transparency in receivables, meaning that problems and risks can be spotted and addressed more quickly. The main benefit of the new analytics being used in receivables finance, and trade finance more broadly, is that it allows programmes to benefit from greater operational efficiency and speed. This helps to reduce costs for investors as well as the risk of default and fraud.

Credit assessments are becoming more accurate as the access to timely and precise data improves. In addition, automation is taking most of the legwork out of money laundering checks. This frees up time for analysts to conduct deeper research and investigation, and planning of their programmes, which adds more value and increases the potential for betters returns.

For funders and asset managers investing with an ESG objective, technology allows only those companies fulfilling specific criteria to be included in the programme. The result is access to receivables finance as part of the portfolio and a guarantee that companies unaligned with the fund’s principles will be excluded.  

Aronova – innovating working capital finance

The trend towards digitisation of trade receivables during the COVID crisis has accelerated. Remote working has made paper-based processes less viable and has injected urgency into financial service providers’ previously slow-burning digital initiatives. As a result, digital financing flows jumped across the entire financial services industry during 2020.

Aronova’s platform makes receivables-backed working capital programmes easier to monitor, offering investors additional assurance about regulatory compliance as well as the performance of underlying assets, almost in real time. This significantly mitigates fraud and changes in risk profiles, allowing decision makers to plan proactively.

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